By Lucia Mutikani

WASHINGTON, (Reuters) – The fourth quarter saw an acceleration in U.S. economy growth as companies replenished their inventories in response to strong consumer demand. This helped the country to record its highest performance for nearly 40 years in 2021.

The massive fiscal stimulus, as well as extremely low interest rates, fueled last year’s growth. But, December saw a drop in momentum due to the Omicron variant of COVID-19, which caused a surge in COVID-19-related infections. This led to a decrease in spending, as well as disruptions at service and factory businesses.

According to the Commerce Department, Thursday’s fourth quarter advance gross domestic product report would be supportive of Federal Reserve’s move toward raising interest rates for March. It also diminishes prospects that President Joe Biden will spend more.

After a two-day meeting, Fed Chair Jerome Powell stated to reporters Wednesday that the economy doesn’t require sustained high levels of Monetary Policy Support and it would soon be appropriate for him to increase rates.

Sung Won Sohn (finance and economics) said, “We had strong tailwinds from inventory accumulation. That boosted growth.” “We have never spent as much money before. Biden’s administration overstimulated the economy, and the Fed supports that effort.

An economist survey by Reuters found that the GDP growth rate was 5.5% last quarter. This would represent a significant increase from the 2.3% rate in the third quarter.

The estimates ranged between a low 3.4% rate and a high of 7.0%. However, the survey was done before Wednesday’s release of data that showed a record-breaking deficit in goods trade in December as well as a spike in retail inventories.

Strong retail inventory accumulation prompted economists at JPMorgan (NYSE 🙂 to increase their estimates of GDP growth to 7.5%.

In 2021, the growth rate is expected to be 5.6%. That would make it the fastest pace since 1984. 2.4% was the lowest economic growth in the past 74 years.

The strong rebound in growth that occurred last year may be a sign of good fortune for President Biden, whose popularity has fallen amid a stalled economic agenda at home. After Congress failed pass his $1.75 Trillion Build Back Better legislation, it is now impossible to predict what the future holds.

All about INVENTORIES

The bulk of GDP growth during the fourth quarter is likely to be due to inventory investment. Companies had already been decreasing inventories since 2021’s first quarter. The pandemic saw spending shift to services from goods, which prompted supply chain pressure.

JPMorgan estimates that inventories increased at $167 billion per quarter, after accounting for inflation.

The GDP growth rate was likely to have been 2.5% if inventories are excluded.

The quarter’s growth was also helped by an increase in consumer spending last October, before falling significantly as Omicron spread throughout the country. The shortage of goods and motor vehicles has hampered consumer spending which is responsible for over two-thirds economic activity. Production is being affected by a global shortage of chip technology.

Inflation at a level well above the Fed’s 2% target also impacted household purchasing power. This also hampered consumer spending in the final quarter.

Ryan Sweet is a senior economist with Moody’s Analytics (NYSE:) in West Chester. “It looks like Omicron’s doing significant damage to our economy this quarter,” Sweet said. “The good news: daily COVID-19-related cases in the U.S. have been declining. If this trend continues, we could see the last of this tsunami’s damage to growth.”

Omicron-driven infections have also had an impact on the labour market. In mid-January, first applications for unemployment benefits rose to a three month high.

According to Reuters, data from Thursday’s Labor Department is expected to indicate that initial claims for unemployment benefits fell 26,000 to a seasonal adjusted 260,000 in the week ending Jan. 22, as per a Reuters survey.

Business spending on equipment is likely to have supported GDP growth in last quarter, after it was held back by truck shortages.

For the sixth consecutive quarter, trade was likely to be a factor in GDP growth. However, it is probable that the housing market has regained some of its strength after having contracted for two quarters. The sector is still constrained by the high cost of building materials which have led to a huge backlog.

The economy will continue to grow despite the expected slowdown in the first quarter due to challenges such as the ever-ending pandemic and the worst inflation since decades. There are also supply chain bottlenecks, interest rate rises, and the constant threat of the not-ending panademic.

Sam Bullard is a senior economist from the University of Michigan. He stated, “We see that the economy continues to grow above it’s natural speed limit through 2012 amid still-solid demand and a need for replenishing severely depleted stock levels and manufacturers obligation to fulfill record amounts of backlog orders.” Wells Fargo Charlotte (NYSE:), North Carolina